Corporate Free Cash Flow Positive – The Big Turn?

March 26, 2010

The tide has almost completed its turn on India: growth is well and truly back, cash (market flows) is coming, and corporates are beginning to turn in cash.

India’s high-investment-growth phase has been fuelled/dependent on capital markets, in part given its FCF-negative status in recent years. As India Inc turns FCF- positive, could this change? There are caveats – growth lies outside top corporates/SPVs, so not captured by estimates; fiscal deficit is divestment-dependent; corporate capex is still subdued, but could rise with confidence /capital availability; and 3G licenses, potential acquisitions are not incorporated.

Citigroup estimates for 118 stocks ex-financials suggest: FY10 will be the first FCF-positive year since FY08; FCF could rise sharply over the next 3 years – 5x in absolute terms, India’s FCF yield in 2012E would be 3.7% (rise 4x vs. a 2x increase in earnings yield over the same period), capex will remain high (but flat, rising 0.8%), but overshadowed by operating cash flows swelling 44% over
FY10-12E.